Commodity Exchange Market

Development of a model for the establishment of commodity exchange market in Bangladesh: A
mechanism for mitigating the risk of price volatility of commodities.
1.0 . Introduction
In general commodities exchange implies an exchange where various commodities and derivative
products are traded. A commodity exchange, more precisely, is defined as an organized market
where contracts on commodities are available for purchase or sale at an agreed price and for
delivery on a specified date. Most commodity markets across the world trade on contracts based
on agricultural products and other raw materials (like jute, wheat, barley, sugar, maize, cotton,
cocoa, coffee, milk products, pork bellies, oil, metals, etc.). This market in effect provides
insurance against the risk of price changes by transferring that risk to speculators who are willing
to assume it. Commodity exchanges are divided roughly into three main types: metal exchange,
fuel exchange, and soft (agricultural) commodity exchange. This market is also called commodity
futures market.
Commodity futures markets perform two essential functions:
First, they facilitate the transfer of price risk and increase liquidity between agents with
different risk preferences.
The second major economic function of future markets is price discovery. Commercial
traders, including producers and processors of agricultural commodities, utilize futures
contracts to insure their future inventories against the risk of fluctuating prices.
Commodities contracts include forwards, futures and in some cases, options on futures. In the
commodities markets, the parties to a future trade thus can set and lock a price through
entering into the contract.
1.1. Background of the Research
If we look at the domestic market of Bangladesh then we will find that during bumper harvest of
paddy, jute, and potato price fall drastically. If we consider our export and import basket then
also we will find that different items like Jute, cotton (industrial input), wheat, sugar,
soybean oil etc face price volatility a lot. It is the most common practice in the international
markets for commodity importers and exporters to transfer the risks through financial
instruments. Unique nature of commodities market lends its benefits to a wide spectrum of
people like investors, importers, exporters, producers, corporate etc. In Bangladesh some
organizations who are pioneer in their sectors and follows international practices, has started
using commodity derivative through developing financial partnership with bank like
Standard Chartered by entering into different deals. So, it is high time to establish
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commodity exchange market in Bangladesh for the betterment of farmers, producers,

importers, and exporters. Then farmers/producers/exporters/importers will be able to lock
prices through contracting and will be able to reduce risk of drastic price drop.
2.0.
Environmental Context of the problem: Price volatility of some selected

commodities
Commodities like jute, paddy, potato, wheat, soybean oil, sugar, cotton face regular price
fluctuation and these are the items upon which our country is heavily dependent. Price volatilities
for these items are described below:
2.1. Jute
Jute trade is currently centered around the Indian subcontinent. The major producing countries
of Jute are: Bangladesh, India, China, Thailand, and Myanmar. The industrial term for jute fiber
is raw jute. Bangladesh is the largest exporter of raw jute, and India is the largest producer as
well as largest consumer of jute products in the world (Wikipedia, 2011). USA, Ghana, Syria,
Turkey, Egypt, Belgium, UK, Saudi Arabia, UAE are the major importers of jute goods. Figure01 demonstrates top 5 jute producers of 2008 where India enjoys the leading position followed
by Bangladesh. Bangladesh contributes 26.35% in the total production (made by top 5
countries).
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Figure 01: Top jute producers in 2008, Source: Food and Agricultural Organization of United Nations: Economic and
Social Department: The Statistical Division
Yearly price volatility for raw jute: Unit price of raw jute also varies over the period of time. Figure 02
exhibits a snap on price volatility for raw jute and this volatility affects raw jute exporters. Figure shows
that unit price of raw jute was highest in April-June of 2008 and after that it started falling from USD 45.56
to USD 42.55.
Figure 02: Unit price of per bale raw jute, Source: Bangladesh Bank and Export Promotion Bureau
2.2. Paddy
If we consider farm level i.e. the price obtained by paddy growers (shown in figure 3) then we
will find that price varies a lot for the growers. In the farm level, lowest price was Tk 10.00
(January 2007), highest price was Tk 16.00 (August, 2008) and after that price of paddy declined
again at the growers level. Wholesale and retail price also followed the trend of growers price.
During December 2009, farm level price of paddy was Tk. 14.50 per kg, average wholesale price
of coarse rice was Tk. 22.66 per kg in the domestic market. On the other hand, retail price of rice
was Tk. 24.33 per kg. Yearly price volatility of paddy-
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Figure 03: Monthly Wholesale and Retail Price Of Rice (Coarse) and Paddy Price at the Farm Level: January 2007 to
December 2009
Note: In demonstrating price volatility of different commodities, USD price is used for import and export commodities and for
domestic cases, price is given in BDT.
2.3. Potato
According to Trading Corporation of Bangladesh, since the beginning of the harvest, the retail
prices slumped more than 60 percent to Tk 6-Tk 8 a kilogram at city markets. At the grower level,
potatoes were sold at Tk 3-Tk 5 at that time. Each and every year farmers of potato face this sort
of problem during the harvest time.
2.4. Wheat, Soybean oil and Sugar
Bangladesh largely depends on the different countries for importing wheat, soybean oil, and sugar
to meet the demand of people. Bangladesh imported wheat of $643 million, sugar of $413
million, and soybean oil of $865 million in 2009 (Statistics department, Bangladesh bank).
Figure
04
shows
that
International price of wheat,

and soybean oil (crude) were
significantly
high
during
mid-2007 to mid-2008. At
that time, price of sugar had
risen at a relatively lower
pace International price of
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sugar has almost doubled during the last one year (increased from USD 259 per mt (metric ton) in
December 2008 to USD 510 per mt in December 2009). Wheat price had been declining during
March 2008 to September 2009 and started to increase after that. Wheat price has increased from
USD 191 per mt in September to USD 206 per mt in December 2009. It is known that
Bangladesh imports most of her crude soybean oil from the international market, primarily from
Argentina, Brazil and USA. Crude soybean oil is refined and marketed by a number of companies
in the country. After the very high price of crude soybean oil in the international market during
2007 and 2008, prices returned to normal trends in November 2008 and remained low till March
2009. Since April 2009, price of crude soybean oil has been showing fluctuating but rising trend.
International price of crude soybean oil increased from USD 725 per mt in March 2009 to USD
933 per mt in December 2009 .
Figure 04: Price volatility of Wheat,
Soybean oil, and Sugar
2.5. Cotton
In the year 2009, Bangladesh imported raw cotton of $1291 million and in 2010 it was $1439
million (provisional). Bangladesh requires importing raw cotton for textile sector mainly and we
are in the top 5 among the cotton importing country. Price fluctuations of cotton affect a lot the
business that is related with cotton import.
Table 01: Top 5 cotton importing country of the world
Top 5 Cotton Importing Country of the World

(Millions of metric tons)
year
Country
China
Bangladesh
Turkey
Indonesia
Thailand
2006-07
2.3
0.7
0.9
0.5
2007-08
2.5
0.8
0.7
0.5
2008-09
1.5
0.8
0.6
0.4
2009-10
2.4
0.8
1.0
0.5
0.4
0.4
0.3
0.4
Source: USDA
Price volatility of Cotton

Cotton prices have received a lot of
attention recently. Cotton prices
have risen in 2010 to their highest
levels in almost 15 years. Cotlook
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'A' Index is widely considered to be a proxy for the world price of cotton and in response of the
incremental scenario of cotton price sector like textile manufacturing affected a lot and prices for
all fibers, including synthetics, have risen as well. Figure 5 shows that- A index started raising
after March 2009 and from 50 cents/lb it reached to 180 cents/lb by November 2010.
Figure 05: Price volatility of cotton, Source: USDA
Prices of cotton as a major industrial input have historically been very volatile in the international
markets. To face the situation, it is the most common practice in the international markets for
commodity importers and exporters to transfer the risks through financial instruments.
3.0.
Objectives of the Research

3.1. Broad Objective of the Research
Broad objective of the study is to explore a model for the purpose of establishing a commodity
exchange market in Bangladesh which will act as a mechanism for mitigating the risk of price
volatility of commodities.
3.2. Specific Objectives of the Research
To explore a model for the commodity exchange market of Bangladesh through analyzing
the model/structure of well-established market of India as well as recently developed
commodity exchange market of Nepal, Srilanka, and Ethiopia.

To identify prerequisites for the development of a commodity exchange market in
Bangladesh.
To explore the possibility/viability of the implementation prerequisites for the
development of commodity exchange market.
4.0.
Methodology of the Research
Research Type: Exploratory type of research has been designed to develop a model for the
establishment of commodity exchange market in Bangladesh. Main focus has been given on
identifying pre-requisites for the establishment of commodity exchange market, potential
resource requirements etc.
4.1. Sources of Qualitative Data
4.1.1.
Primary Data:
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Primary data have been collected through in-depth interview where focus has given on per-requisites for
the establishment of the commodity exchange market. Those who are involved with the establishment of
commodity exchange market (development of initial phase) among them five interviews are taken to get the
insights. Number of interviews is limited as expert opinion providers in this regard are very few.
4.1.2. Secondary Data:
Secondary data related with commodity exchange market establishments have been collected from different
newspaper articles, and exchange
market websites of Nepal, Sri Lanka, India, and Ethiopia.
4.2. Method of Data Collection:

Primary data have been collected through unstructured questionnaire and the flow that was
maintained for the purpose of interview given below:
Necessity of establishing commodity exchange market in Bangladesh
Advantage of having an exchange based platform
Pre-requisites for the establishment of commodity exchange market
Required resources for the establishment of commodity exchange market
Issues that need to be addressed during the establishment of commodity exchange

market.
4.3. Data Analysis Approach: Qualitative data analysis approach
5.0.
Literature Review
There are few studies related to commodity exchange market in Bangladesh. Parvez, Asif (2009)
conducted a study on The Prospect of commodity exchange for Bangladesh where his main
focus was on the functionalities of commodity exchange market and perceived benefit of
commodity exchange market. From the study it was found that establishment of commodity
exchange market in Bangladesh will facilitate blooming of many trading firms (trading arcade)
where traders will be able to utilize a wide range of strategies including technical analysis,
fundamental analysis or/and statistical arbitrage to take positions in the market place in a
variety of assets and they will get the opportunity to speculate, providing liquidity to the market.
Khan, Salahuddin and Talukdar, Bakhtear (2009) addressed that systematic market information
based trading mechanism along with wider participation in the markets need to be established
in the country to minimize oligopolistic cartels (or syndication arrangements) and their
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perception was: a well functioning commodity exchange along with appropriate regulatory
framework and infrastructural facilities can attain this objective effectively.
6.0.
Environmental and Situational Analysis

6.1. Overview of Commodity Exchange Markets in South Asia and Africa
(Ethiopia)
In South Asian context besides India, Srilanka and Nepal have also established the commodity
exchange market in their countries. Indian commodity exchange market is trading 24 goods
consisting of cash crops, food grains, plantations, spices, oil seeds and metals Pakistan
commodity exchange market trades gold, cotton, yarn, sugar, rice and wheat in their exchange
centre in Karachi, while Nepal is exchanging cash crops, food grains, vegetables, spices, oil
seeds, metals and bullion.
6.1.1. Nepal Derivative Exchange Limited: NDEX
The Nepal Derivative Exchange (NDEX) is an Electronic Commodity and derivative Market
which provides online state-of-the-art platform for traders to buy and sell Commodities and
derivatives products efficiently and at a justified price. NDEX aims to facilitate trading on
commodities, metals, energies, currencies and others.
NDEX provides the best and genuine platform for traders, investors, farmers, financial
institutions and others to trade in commodities, energies, and other products to get attractive
returns and mitigate their respective risk. It provides insurance against fluctuating products
prices. NDEX provides these services in the form of commodities and derivatives trading.
NDEX is a professionally managed on-line multi commodities and derivatives exchange. NDEX
is a public limited company incorporated on November 20, 2008 under the Companies Act, 2063.
Matching principles for Orders and Quotes: Price/Time Priority
Orders and quotes are entered into the central order book; they are sorted by type, price and entry
time. Orders and quotes in the central order book are anonymous: A trader never knows the
opposite side on a trade executed through the exchange. NDEX Trading-Cum-Clearing Brokers
are always the counterparty, which is managed and monitored by clearing and settlement
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department of NDEX. Orders and quotes at a given price level are aggregated, although the
number of orders and quotes making up the total remains unknown. Participants only see the
specific details of their own orders. For all products, the best bid and ask prices, as well as their
respective aggregated bid and offer sizes, are always available in real time.
Price/Time Priority: The principle of price/time priority refers to both orders and quotes. When
an order (or quote) is entered into the order book, it is assigned a timestamp. This timestamp is
used to prioritize orders in the book with the same price - the order entered earliest at a given
price limit gets executed first. When a new order (or quote) is entered, the NDEX system first
checks the limits of all orders contained in the central order book. If the incoming order is
immediately executable, meaning it is capable of being matched against an existing order or
orders; one or more transactions are generated. Orders may not necessarily be executed at a single
price, but may generate several partial transactions at different prices. When a large order
executes against the total available quantity at a given price level, the next best price level
becomes best. This process continues as long as the incoming order remains executable. If not
executed upon entry, an order is held in the central order book.
6.1.2. Mercantile Exchange Limited: MEX Lanka
MEX Lanka, the largest commodity marketplace in Sri Lanka, provides real-time prices of major
commodities in an easily understandable interface. MEX Lanka Ltd, the leading online
commodity futures exchange in Sri Lanka, by employing the latest technologies, has made online
commodity trading possible in Sri Lanka. The prices are automatically updated that allows to
monitor progress of various items such as energies, metals, grains, livestock, and, finally, soft
materials through the trading day. With these live prices traders can closely monitor the market
movement and trade accordingly.
Categories of trading commodities
1. Energy (including crude oil, heating oil, natural gas and gasoline)
2. Metals (including gold, silver, platinum and copper)
3. Agricultural (including corn, soybeans, wheat, rice, cocoa, coffee, cotton and sugar)
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Trading System Architecture of MEX Lanka
Participants
Producer
Importer
Speculators
Member
Hedges
Consumer
Member
Market Maker
Clearing
Quote/Order
MEX
*Clearing members play the role of market making by accepting the risk of holding any of the
traded commodities in order to facilitate trading in those commodities.
Source: Mercantile Exchange Limited
Figure 06: Trading system architecture of MEX Lanka
6.1.3. Multi Commodity Exchange of India Limited

Multi Commodity Exchange (MCX) is an independent commodity exchange based in India. It was
established in 2003 and is based in Mumbai. The turnover of the exchange for the fiscal year
2009 was US$ 1.24 trillion, and in terms of contracts traded, it was in 2009 the world's sixth
largest commodity exchange.
MCX is India's No. 1 commodity exchange. Globally, MCX ranks no. 1 in silver, no. 2 in
natural gas, no. 3 in crude oil and gold in futures trading. The highest traded item is gold.
MCX has several strategic alliances with leading exchanges across the globe.
As of early 2010, the normal daily turnover of MCX was about US$ 6 to 8 billion
MCX now reaches out to about 800 cities and towns in India with the help of about 126,000
trading terminals
MCX COMDEX is India's first and only composite commodity futures price index and It is
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regulated by the Forward Markets Commission.
Trading at MCX: The Trader Work Station (TWS) is the application through which members
access the trading platform, place orders and execute trades. The TWS offers a multitude of user
friendly trading features which include commodity price ticker, market watch screen displaying
best buy, best sell, last traded price, volume for the day, open interest etc., top gainer and loser
contracts, net position, on-line backup facility etc.
Trading System: The best five buy and sell orders for every contract available for trading are
visible to the market and orders are matched based on price time priority logic. Orders can be
placed with time conditions and/ or price conditions. MCX has four types of orders and they are
DAY order, A Good Till Cancelled (GTC) order, A Good Till Date (GTD) order, and An
Immediate or Cancel (IOC) order.
6.1.4. National Multi Commodity Exchange of India Limited (NMCE)
Traders submit orders and the incoming orders are matched against the existing orders in the
order book. Transactions are cleared and settled through NMCEs in-house Clearing and
Settlement House, which is connected to all its Members and the Clearing Banks. Delivery of the
underlying commodities is permitted only through a Central Warehousing Corporation (CWC)
receipt, which meets highest contemporary international standards. Anonymity of trading
participants and effective risk management system strengthens the trust of the participants in the
trading system, which is a precondition for enhancing breadth and depth of the market.
How NMCE is structured?
Ministry of Consumer Affairs,
Food and Public
Distribution
(Government of India)
Forward Market
Commission
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National Multi Commodity

Exchange (NMCE)

Trading Cum Clearing

Members (TCM)
Institutional Clearing
Members (ICM)
Trading Members
Traders
Source: National Multi Commodity Exchange of India Limited (NMCE)
Client/ Non Registered

Member
6.1.5. The National Commodity & Derivatives Exchange Limited (NCDEX) of India
NCDEX commenced operations on December 15, 2003 and offers trading facilities through its
trading and clearing members spread across over 150 centres in the country. NCDEX leveraged
the expertise of CRISIL Limited (earlier known as the Credit Rating Information Services of
India Limited), ICICI Bank Limited, IFFCO, Life Insurance Corporation of India (LIC), National
Bank for Agriculture and Rural Development (NABARD), National Stock Exchange of India
Limited (NSE) and Punjab National Bank (PNB) to realize its potential in the commodity space
for the benefit of its trading and clearing members.
6.1.5.1. The Way Jute Future Contract Works at NCDEX During 1998 to 2004, annual price volatility of raw jute was around 12.6% in India and thats
why Jute future contract was very important for them. Jute futures are exchange traded
contractual obligations to make or accept delivery of a specified quantity and quality of Jute
during a specified time in the future at a price agreed upon at the time the commitment is made.
Jute futures are highly standardized products and futures prices are quoted for Jute products with
precise specifications delivered at a specified location during a specified period of time. Since the
two parties to the transaction trade anonymously, the exchange provides a mechanism that
guarantees that the contract will be honored and thus eliminates counter party risk.
6.1.5.2. Functions of Jute futures markets

Since the futures prices reflect the collective perception of the market participants about the
future price level, futures markets provide an important function of price discovery. In fact the
spot price generally converges to or is close to the futures price.
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Secondly, these markets help transfer risk from one class of participants (Hedgers, speculators
and arbitrageurs) to the other. Typically, less than 1 per cent of the total traded volume in futures
markets results in delivery. Most market participants choose to buy or sell their physical supplies
through their regular channel, using futures to manage price risk and liquidating their positions
before delivery.
6.1.5.3. Spot prices dissemination on NCDEX

The exchange disseminates the spot prices prevalent for Jute at Kolkata three times a day to its
trader workstation, its website and to various data vendors like Telerate. Through a process
known as polling, the exchange randomly calls up 25 market participants from a panel of 40
market participants and asks them for the spot prices thrice a day. After collecting the raw prices,
the exchange carries out a process called bootstrapping, a scientific procedure for removing the
outliers of raw prices (i.e. prices that too far away) and averaging the remaining prices. NCDEX
has outsourced the spot price polling to CMIE (Center for Monitoring of Indian Economy). The
exchange also invites spot market players for participating in the spot price polling process.
6.1.5.4. Risk mitigation at NCDEX
Trading on exchanges eliminates counter party risk. This is because the exchange is the central
counter party to all market participants. In other words, all trades executed on the exchange are
guaranteed by the exchange and the counter party credit risk is assumed by the exchange. The
exchange manages this risk by a system of margin collection. Each trade on the futures market
requires the payment of an upfront margin (or good faith money). Typically this margin is a very
small percentage of the actual transaction value and is calculated to cover potential price
movements in a single trading day. In addition the positions on the futures market are marked to
market on a daily basis. The client also needs to pay a daily market-to-market margin.
6.1.6. Ethiopia Commodity Exchange
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Agriculture has always been the backbone of Ethiopias economy and they felt that to lift millions
of Ethiopians out of poverty a transformation is required which take account of transforming
centuries-old subsistence agriculture to dynamic, technology-driven,market-oriented production.
They focused on coverting the market itself to function in such a way that serve the needs of all
concerned.
Dr. Madhin, Eleni Gabre (2007) stated that the Ethiopia Commodity Exchange, or ECEX, is a
marketplace, where buyers and sellers come together to trade. ECEX is a national multicommodity exchange that
Provides market integrity by guaranteeing the product grade and quantity and operating a
system of daily clearing and settling of contracts.
Enhances market efficiency by operating a trading system where buyers and sellers can
coordinate in a seamless way on the basis of standardized contracts.
Enables market transparency by disseminating market information in real time to all

market players, and
Allows risk management by offering contracts for future delivery, providing sellers and
buyers a way to hedge against price risk.
Ethiopia Commodity Exchange (ECX) commenced trading operations in April 2008.

The ECEX Edge Integration:
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Figure 07: Commodity exchange market of Ethiopia
Integrated Design of ECEX
A national multi-commodity exchange based in Addis Ababa

Operation of a trading platform using combination of open outcry (floor) and electronic
trading platform
A network of 10 ECEX warehouses in surplus areas
A network of 20 ECEX remote access terminal centers in major markets
200 Market Information Points (Rural Electronic Price Tickers) at district level
Internal clearing and settlement system with 3 partner Settlement Banks
6 target commodities: maize, wheat, teff, pea bean,sesame, coffee ($1 billion in physical
trade)
Spot and futures contracts (on selected commodities)
Grain Market Structure of Ethiopia with Exchange
Figure 08: Market structure of Ethiopia with Exchange
EGTE: Ethiopian Grain Trade Enterprise, COOPS: Co-operatives in Ethiopia
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6.2. Overview of Future Market (unorganized) in Bangladesh

Siddiqui M.S (2010) addressed that Bangladesh has futures market name as Dadon or auction for
trading of fruits, vegetable and other agricultural products in its domestic market. In the domestic
market of Bangladesh future trading products are Tobacco and Sugarcane. The buyers of tobacco
are Cigarette industries and sugarcane by local sugar refiners. They fix the prices in advance and
also provide technical support to the growers as well. There is no auction but an agreed price
between buyers and sellers. But involvement of Dadon in trading is harmful for farmers as deal
between farmers and dadon is dominated by dadon persons. Farmers need to comply with dadon
persons and this process does not ensure fair price. Barkat, Abul, Majid M, Mahiyuddin G (2008)
found in his study that In Bangladesh, mainly British American Tobacco Bangladesh Company
Limited (BATB) has been operating as the major sponsor or contractor of contract farming in the
tobacco cultivation for many years. Through the contract farming agreement, BATB provides
credit to the farmers in the form of seeds, fertilizer, pesticides and technical support. The farmers
are usually obligated to sell tobacco leaf to the company at a set price. Farmers invest in tobacco
because they get contract facility in spite of its lower net return per bigha lower than the net
return of potato, winter vegetables, chili, and onion & depletion of soil nutrients at a heavy rate
(as it requires regular inputs of chemical fertilizers). Apart from depleting soil nutrients,
cultivation of tobacco involves extensive use of pesticides which have negative impact on
cultivation of crops in the neighboring land and poison farm-workers and cause chronic health
problems. Researcher has suggested that the Government should encourage cultivation of
alternative crops and provide easy credit facilities and other supports to the farmers, should take
necessary measures to establish sufficient storage facilities in the rural areas so as to reduce the
risk of damaging crops and ensure proper price to the farmers.
So, if we consider the issues then we will find that it is very important for us to have a commodity
exchange market in Bangladesh where every farmers or producers will be able to discover fair
price and consumers or investment companies will purchase commodities by providing fair price
to them.
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6.3. Opportunities that commodity exchange market provides to different parties

Commodity exchange market provides opportunity of the speculation, hedging against price
fluctuations, and arbitrage to different parties involved in the exchange market. The ways through
which different parties get benefits are described in the following6.3.1. Speculation
It facilitates speculation by providing opportunity to people, although not involved with the
commodity, to trade on the views in the movement of commodity prices. The speculative position
is taken with a small margin amount that is paid to the exchange, and the contract can be squaredoff anytime during the trading hours.
6.3.2. Hedging
The futures market will provide an effective hedging mechanism against price movements for the
people associated with the commodities. For example, a potato farmer may go short in potato
futures, thus locking his sale price and in the process hedging against any adverse price
movements. On the other hand, a processor of potato (as there are agro processing
industries)/wholesalers/different supershops may buy potato futures and thus assure a supply of
potato at a pre-determined price.
6.3.3. Arbitrage
Traders may exploit arbitrage opportunities that arise on account of different prices between the
two exchanges or between different maturities in the same underlying.
6.3.4. Ways through which different parties avail opportunities from commodity
exchange market
For an importer or an exporter, commodity contracts can help them in the following ways
Hedge against price fluctuations Wide fluctuations in the prices of import or export
products can directly affect their bottom-line as the price at which they import/export is
fixed beforehand. Commodity contracts help them to procure or sell the commodities at a
price decided months before the actual transaction, thereby ironing out any change in
prices that happen subsequently.
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For producers of a commodity, futures can help as follows:
Lock-in the price for their production For farmers, there is every chance that the price
of their produced commodity may come down drastically at the time of harvest. By
taking positions in commodity contracts they can effectively lock-in the price at which
they wish to sell their produced commodity.
Assured demand Any glut in the market can make them wait unendingly for a buyer.
Selling commodity futures contract can give them assured demand at the time of harvest.
For large-scale consumers of a product, here is how this market can help them:
Cost Control For an industrialist, the raw material cost dictates the final price of their
output. Any sudden rise in the price of raw materials can compel them to pass on the hike
to their customers and make their products unattractive in the market. By buying
commodity futures, they can fix the price of their raw material.
Ensures continuous supply Any shortfall in the supply of raw materials can stall their
production and make them default on their sale obligations. They can avoid this risk by
buying a commodity futures contract by which they assured of supply of a fixed quantity
of materials at a pre-decided price at the appointed time.
7.0. Feasibility of the Commodity Exchange Market in Bangladesh

To explore whether establishment of commodity exchange market in Bangladesh is possible or
not two issues are very important and the issues are What are the pre-requisites for the establishment of commodity exchange market .
Different potential sources that will facilitate establishment of commodity exchange
market.
7.1. Prerequisites for the development of a commodity exchange market in Bangladesh
For the development of a commodity exchange market major pre-requisites are7.1.1. Warehouses for physical delivery/settlement
Physical settlement involves the physical delivery of the underlying commodity, typically at a
certified warehouse. The seller intending to make delivery would have to take the commodities to
the designated warehouse and the buyer intending to take delivery would have to go to the
designated warehouse and pick up the commodity. The efficacy of the commodities settlements
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depends on the warehousing system available. Most international commodity exchanges used
certified warehouses (CWH) for the purpose of handling physical settlements.
So to provide platform for futures trading in agricultural commodities and non-agricultural
commodities, exchange market will require a large number of warehouses and support from
collateral management organizations for managing warehouses professionally. CWH are required
to provide storage facilities for participants in the commodities markets and to certify the quantity
and quality of the underlying commodity. The advantage of this system is that a warehouse
receipt becomes good collateral. Warehouse receipt will be given to ensure ownership of
commodities that are stored in a warehouse. Warehouse receipts will also act as indicator of
ownership about inventory goods and/or unfinished goods stored in a warehouse by a
manufacturer or distributor. Warehouses also need to be conveniently located with adequate
capacity to fulfill the need of physical delivery. Government controlled warehouses can be the
major providers of agricultural produce storage facilities.
7.1.2. Institute for Quality Assurance: Grading and Standardization
Commodity derivatives demand good standards and quality assurance/certification procedures. A
good grading system allows commodities to be traded by specification. Independent labs or
quality testing centers should be set up in each region to certify the quality, grade and quantity of
commodities so that they are appropriately standardized and there are no shocks waiting for the
ultimate buyer who takes the physical delivery. A committee can be created where personnel from
Department of agriculture, Jute Export Corporation, National agricultural research system and
other 11 research institutes will work to support quality testing institute.
7.1.3. Cold storage facility
For the perishable agro commodity like potato, vegetables; commodity exchange market will
require cold storage facility. Islam M.M., Kabir H. M., and Kabir M.S. (2008) stated that there are
283 cold storage facilities are available with a capacity of 2500 metric ton (average) and the
present capacity is not sufficient. To establish commodity exchange market, capacity of cold
storage will have to expand.
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7.1.4. Development of Co-operative Society among Participants of Exchange Market

To ensure involvement of farmers (in case of agricultural commodity) from Pan Bangladesh in
the commodity exchange market, Samity/Co-operatives can be built among them. Collaboration
with Community Information Centers/ Support from ICT sector can be taken.
Other participants (from non-agricultural products) can build their separate association based on
their sector and this will help them to obtain regular information.
7.1.5. Involvement of Financial Institutions and Agro processing industry
Involvement of financial institutions will play very important role for the development of
commodity exchange market. They can assist participants of commodity exchange market
through accepting warehouse receipt as collateral. Financial institutions can also play positive
role in the clearing and settlement of exchange market.
7.1.6. Development of Market Information System
Commodity exchange market will require proper information system for ensuring market
information availability to all. Commodity exchange market need "Gateway" between the traders
and the commodity exchange, which will manage all the transactions and database operations
between the traders.
7.1.7. Regulator
Regulators play very important role for the efficient operation of commodity exchange market.
The main objectives of the regulatory bodies are: (i) to ensure that market efficiently promotes
the twin economic functions price discovery and price risk management; (ii) to maintain market
integrity and financial integrity across the market, the exchange and the intermediaries (e.g.
brokers, warehouses, and assayers etc.).
Major tools of used by regulators for market regulations are:
Maintaining Financial Integrity- assessing the capital adequacy of exchanges and

intermediaries; and ensuring payment of adequate margins by Intermediaries.
Maintaining Market Integrity - conducting effective surveillance and monitoring; and audit of
exchanges and intermediaries.
Ensuring Alignment of Future and Spot Prices - ensuring final settlement based on correct
spot prices
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Investor Protection-overseeing fair and even headed conduct of the exchanges; and providing
protection against unscrupulous intermediaries.
Fairness and Transparency in Trading, Clearing and Settlement Process- Setting up

exchanges; introducing electronic trading; and establishing corporate governance in the
exchanges.
Predominantly two sets of systems are in operation for regulation. In one case, separate
regulatory body is established to regulate the commodity derivates market. In other case, common
regulatory bodies are regulating both the financial derivates market and the commodity derivates
market. Instances of countries having common regulators for securities market and commodities
derivatives market are provided in Table 2.
Table 02: Countries Having Common Regulators for Financial and Commodity Derivatives
Country
China
Malaysia
Romania
UK
Turkey
Australia
Singapore
Commodity Exchange
Dalian Commodity Exchange
Shanghai Futures Exchange
Zhengzhou Commodity Exchange
Bursa Malaysia Derivatives
Stock Exchange
Shanghai Stock Exchange
Common Regulator
China Securities Regulatory
Commission (CSRC)
Bursa Malaysia Securities
Sibiu Monetary Financial and

Commodity Exchange
Inter Continental Exchange
London Metal Exchange
Turkish Derivative Exchange
Sydney Futures Exchange
Bucharest Stock Exchange

London Stock Exchanges
Securities Commission of
Malaysia
Securities and Exchange
Commission
Financial Service Authority
Istanbul Stock Exchange

Australian Stock
Exchange
SGX
(Singapore Exchange Ltd)
Capital Market Board

Australian Securities &
Investment Commission
Monetary Authority of
Singapore
Joint Asian Derivatives Exchange

Singapore Commodity Exchange
So, initially in establishing commodity exchange market for Bangladesh security exchange
commission can play the authoritative role. Later on, if it seems that SEC is facing problem then
authoritative role can be given to separate entity who will be only one regulator for commodity
exchange market.
7.2. Resource Requirement and Potential Source
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From the interview with experts (Those who are working for the establishment of commodity
exchange market in Bangladesh) it is found that estimated total resource requirement is around
USD 18 million and almost 80 percent of total resource would be allocated for automation and
computerization.
Table 03: Required Resources (Approximate)
Items
Cost in Million
BDT
USD
15
0.21
10
0.14
24
0.34
50
0.71
1000
14.29
120
1.71
20
0.29
8
0.11
10
0.14
20
0.29
1277
18.24
Building and Civil Works

Furniture and Fixture
Office Equipments
Networking Equipments
Computerized System
Laboratory and Testing Equipment
Vehicles
Preliminary and Capital Issue Expenses
Contingency
Working Capital
Total
Share
1.17
0.78
1.88
3.92
78.31
9.40
1.57
0.63
0.78
1.57
100
Source: Primary Data (In depth interview of Expert)
This is a technology and human resource based activity and hence success of this venture mainly
will depend critically on engagement of appropriate experts and technology. Both local and
foreign entrepreneurs who are conversant in this field can be encouraged to come forward to
investment in this venture.
From the private sector- ACI, Ispahani, Pran and Rahimafrooz (decided to expand their business
in agro) are interested to invest. So, for warehouses, cold storage, and laboratory testing building
partnership with local enterprises will give better result. For technological issues help can be
taken from outsiders.
In the case of foreign joint ventures, it is expected that selection of proposals will be based on
experiences in derivates market; ability to provide required technology at the least cost and time;
a clear plan and time frame of technology transfer.
8.0. Probable structure for Commodity Exchange Market in Bangladesh
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With regard to the ultimate form and structure of ownership of the commodity exchanges, the
regulator may invite proposals from different institutions. Selection of proposals may be based on
experiences in derivatives market; ability to provide required technology at the least cost and
time; a clear plan and time frame of technology transfer in the case of foreign joint ventures;
financial solvency; delineation of targets/goals with respect to employment generation and
betterment of communities in general. A probable structure for Bangladesh commodity exchange
market is drawn in the following page-
Page 23 of 28
Development of a model for the establishment of commodity exchange market in Bangladesh: A mechanism for mitigating the risk of price volatility of
commodities.
Probable
Structure
of
Commodity
Exchange
Market
of
Ministry of Commerce
Bangladesh: Model for Commodity Exchange of Bangladesh

Regulators
Trading system: price/time

priority for order/quote
Access to Market
information (Real time data)
: Networking and
Computerization
Security and Exchange

Commission-Initial/Pilot
Phase
Bangladesh Commodity
Exchange Market Authority
BCEX
Bangladesh Exchange Market
Clearing Members
Trading
members
Hedgers
(Producers, Farmers, Importers, Exporters)
3-Tier Regulation after the

Implementation of Pilot
phase
Establishment of Commodity Exchange

Market through Joint Ventures
(After the initial phase)
Clearing settlement
Exchange
warehouses
Exchange
clearing
banks
Independent Testing Center/BSTI with

the enhancement of its strengths
Grade Certification
Warehouse
receipt
Arbitragers
Speculators
Figure 09: Probable Structure of Commodity Exchange Market of Bangladesh-Model for Commodity Exchange of Bangladesh
Page 24 of 28
Public-private
partnership can
be built for
warehouse
facilities,
testing centers.

8.1. Regulatory issues

The following sections are found in the existing Laws which make possible for the part of the
Securities & Exchange Commission of Bangladesh to promote and regulate derivatives markets.
Securities and Exchange Ordinance 1969
As per section 2(l) (iii) of the Ordinance, Securities means any instrument including stock,
scrip, note, debenture stock, bond, investment contract and pre-organization certificate or
subscription and in general, any interest or instrument commonly know as a security , issued or
to be issued by or for the benefit of a company, whether incorporated in Bangladesh or not.
[Futures and other Derivatives are investment Contracts]
As per section 2 (m) of the Ordinance, Stock Exchange means any person who maintains or
provides market place or facilitate for bringing together buyers and sellers of securities or for
otherwise performing with respect to securities the functions commonly performed by a Stock
Exchange, as that term is genuinely understood, and includes such market place and facilities.
[The commodity exchange (s) can be specialized Stock Exchange]
As per section 3 of the Ordinance, no stock exchange shall operate unless registered under the
ordinance.
[The commodity exchange (s) can be registered under Bangladesh Companies Act and will apply
for license to the SEC]
As per section 34 (xii) of the Ordinance, stock exchange may make regulations of forward
trading, and carry over facilities in relation to transactions and securities.
As per the section 34(xv) of the Ordinance, Stock Exchange may make regulations of options in
relation to transactions and securities.
Securities and Exchange Commission Act, 1993
As per Section 8 of the Act, two main functions of the Commission are as follows:
Regulating the business of the stock exchange or any other securities market
Registering and regulating the business of stock brokers, sub brokers, share transfer
agents, merchant bankers and managers of issues, trustee and trust deeds, registrar of an
Page 25 of 28

issue, underwriters, portfolio managers, investment advisers and other intermediaries in

the Securities Market.
The regulations of the Commodity Exchange need to be approved by the SEC prior to
implementation. The regulations must concern the following:
a. General Rules and Regulation including the following provisions:
i.
Membership of the Exchange
ii.
Commodity Future Contract
iii.
Trading System
iv.
Clearing House of the Exchange
v.
Default
vi.
Arbitration etc.
b. Trading Regulations
c. Clearing and Settlement Regulations
d. Risk management Regulations
8.2. Issues that need to be addressed during the establishment of commodity

exchange market
In the case of futures contracts, inexperienced investors may face price risk as all futures prices
respond to many factors. Factors like unexpected high inflation, general strikes (hartals), natural
calamities, reports on economic forecasts, politics and even on rumors and many other internal
and external matters can influence commodities prices and for that reason, profits from
commodities trading can be high but price fluctuation risk takes away all the profits any time.
Proper monitoring need to be ensured and issues that may create problems in future need to
monitor properly by the regulatory authority. In selecting commodity some issues need to
consider which include large number of physical market players (buyers and sellers) along the
supply and value chain, high price volatility, large physical market size, and selected commodity
need to be free from monopolized pricing and substantial government control.
Page 26 of 28

9.0. Conclusion
Development of commodity exchange market is very important for Bangladesh to save the loss of
farmers and to ensure proper price of crops during their bumper harvest as well as for importers
and exporters this market is very important as it will help them to save huge amount of money
which they loss due to price volatility.
Warehouses, cold storage facilities, testing facilities need to be developed through the public and
private partnership. Agro-processing organizations like ACI, Pran, and other private organizations
can support in this regard. Other than agro processing organizations, large organizations from
light engineering sector, textile sector are also interested to involve them in the infrastructural
development.
Lack of knowledge can deter stakeholders taking the full advantages of the system. Thus to reap
full benefits with wider participants of stakeholders massive awareness campaign must be
initiated at all levels of the system. Government, private sectors, media, development partners,
Non-government organizations, and civil society activists should be encouraged to participate in
the awareness programs.
Though there are some issues that may interrupt the functional activities of commodity exchange
market but that issues are manageable through proper monitoring and action that will be taken by
regulatory authority.
Page 27 of 28

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Development of a model for the establishment of commodity exchange market in Bangladesh: A

mechanism for mitigating the risk of price volatility of commodities.

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